Unbundling Dell's Businesses

Dell made the news recently. The Wall Street Journal reports that it is seeking to sell off a significant portion of its factory network and logistics operations. This is a big step for Dell but it’s consistent with a much broader trend restructuring business on a global scale.

As I wrote over a decade ago, companies increasingly face an unbundling decision that will force executives to confront the most basic question of all: “what business are we really in?”

Three business types

In brief, most companies today are still an unnatural bundle of three fundamentally different, and often competing, business types:

Product innovation and commercialization businesses – developing, introducing and accelerating the adoption of innovative new products and services

Customer relationship businesses – building deep relationships with a target set of customers, getting to know them very well and using that knowledge to become increasingly helpful in sourcing the products and services that are most relevant and useful to them

These three business types remain tightly bundled together within most companies today even though they have completely different skill sets, economics and cultures required for success. Inevitably, companies deeply compromise on their performance as they seek to balance the competing needs of these business types. More broadly, this tight bundling decreases agility and diminishes learning capacity.

Companies are starting to unbundle but, to date, the efforts have been incremental and driven largely by short-term operational and financial motivations, rather than part of a longer-term strategic initiative. The broad trend towards outsourcing and offshoring over the past couple of decades can be understood as a systematic stripping out of infrastructure management businesses from larger companies.

The Dell dilemma

To the extent that the reports are true (Dell will only say it is continuing to evaluate its manufacturing and distribution options), Dell’s efforts to shed its factories are part of this trend as well. It is particularly striking because Dell’s manufacturing and logistics system was such a core part of its early success in the computer industry. It is a bold and unexpected move to walk away from a core business activity, but it represents a clear understanding of the broader business trends that are re-shaping not just the computer industry, but all industries around the world.

Dell pioneered in the design of a “pull” manufacturing system that allowed customers to specify highly customized configurations of a computer and have them delivered within days. For many years, especially when combined with its innovative use of direct selling channels, this lean manufacturing approach was a source of competitive advantage as other computer companies struggled to replicate this capability.

Over time, though, the market shifted. The market shifted from desktop computers to much more standardized notebook PCs. The customers shifted as well – consumers became a much more significant part of the market. They tended to favor purchases through traditional retail channels, rather than the direct selling channels favored by large corporate buyers, which undermined the opportunity to differentiate through on-demand customization. The focus of manufacturing and logistics shifted from rapid turnaround of direct sales orders for highly customized desktop computers to cost-effective manufacturing of large numbers of relatively standardized notebook PCs for retailers. Dell’s system has been optimized for the former and was not designed for the latter.

Penalties for bundling

Dell’s story illustrates a broader issue associated with tight bundling of these three business types. Markets are becoming increasingly volatile, with demand shifting from one type of customer and product to another very quickly. Companies that persist in all three business types will have a much harder time adapting to these changes quickly, especially relative to companies that tightly focus on one of the three business types and develop a broad network of relationships with partners that can flexibly provide elements of the other two business types.

What may be a source of advantage at one point in time can quickly become a liability as conditions change. Product life cycles are compressing and product markets are evolving more rapidly, especially if they involve digital technology. Any company wanting to be successful in product innovation and commercialization should think long and hard about whether it can afford to compromise on flexibility by locking into proprietary supply chain management or customer relationship management business types.

But it is not just about flexibility. It is about focus and the opportunity to develop world-class capability that can differentiate on a sustaining basis. As the Wall Street Journal reports:

Contract manufacturers can generally produce computers more cheaply because their entire operations are narrowly focused on finding efficiencies in manufacturing, as opposed to large firms like Dell, which must also balance marketing and other considerations.

In a world that is changing at an accelerating rate, we desperately need focus in order to learn faster and improve performance more rapidly than our competitors. If we try to manage activities across too broad a waterfront, we run the risk of losing our edge across more and more of this waterfront. Even if we find ways to build powerful advantages at the outset through creative linking of new approaches across the three business types, those very links can become chains that hold us back as the markets around us evolve in their needs.

The opportunities for growth and consolidation

Focus and unbundling do not equal shrinking or fragmentation. At least two of the three business types outlined above – infrastructure management businesses and customer relationship businesses – are driven by powerful economies of scale and scope. These economics will lead to increasing concentration and consolidation on a global scale. As an example, look at the process of consolidation that has been playing out for years in the global contract manufacturing industry or global logistics markets.

In fact, unbundling will increasingly become a pre-requisite for creating scalable growth platforms. Focused growth will be much more profitable and sustainable. This is the paradox: companies may need to shed in order to grow more rapidly and more robustly.

For this shedding to be most effective, though, it should not be done incrementally in response to near-term operating and financial pressures. It needs to be driven by clear and unequivocal answers by senior leadership teams to that most basic question: “What business are we really in?”

Dell have undergone a massive change in their marketing activity over the last three years. It focuses on engaging customers to generate product innovation and providing deep customer service and relationship management. Two of the suggested three business focuses mentioned above.

There may well be a trend towards unbundling, but the false dichotomy between "infrastructure" and "innovation" and "customer" businesses is a fallacy that belies the reality of successful companies that can balance the trade-offs to do all three.

One domain may be a primary core competence but it is not reasonable to expect companies who only do one thing well to be successful over the long term.

Perhaps we are entering an era in which companies do not survive for decades or even centuries, and will be short-lived successes at one of the three domains.

But I struggle to reconcile this thesis (and, like Michael Treacy's before it) with the reality of companies like Toyota that have proven their ability to transcend all three domains effectively, using a strong base in one area to launch into the others.

Business reality defies simplistic categorization that fits into nice, neat four-quadrant charts on a PowerPoint slide...

@tommi, i would think google is an infrastructure business, or will increasingly go in that direction

killer post, john. the unbundling stuff will become even more important as the economy goes to hell and forces businesses to become leaner and more efficient. everybody needs to get john's book "out of the box," still immensely relevant today.